Spouses Almeda v.

CA,
326 Phil 309
(1996)
Simple Loan/Mutuum - Escalation Clause
FACTS:
The PNB granted to the spouses/ petitioners Almeda, several loan/credit accommodations
totaling P18.0 Million pesos payable in a period of 6 years at an interest rate of 21% per annum. To
secure the loan, they executed a Real Estate Mortgage Contract covering a parcel of land, together with
the building (the Marvin Plaza) located at Makati, Metro Manila.

On March 31, 1984, respondent bank, over petitioners' protestations, raised the interest rate
to 28%, allegedly pursuant to Section III-c (1) of its credit agreement. Said interest rate thereupon
increased from an initial 21% to a high of 68% between March of 1984 to September, 1986.

Before the loan was to mature in March, 1988, the spouses filed on February 6, 1988 a
petition for declaratory relief with prayer for a writ of preliminary injunction and temporary restraining
order with the RTC Makati. The spouses in the said petition sought clarification as to whether or not
the PNB could unilaterally raise interest rates on the loan, pursuant to the credit agreement's
escalation clause, and in relation to Central Bank Circular No. 905.

As a preliminary measure, the lower court issued a writ of preliminary injunction enjoining the
Philippine National Bank from enforcing an interest rate above the 21% stipulated in the credit
agreement. By this time the spouses were already in default of their loan obligations.

The PNB countered by ordering the extrajudicial foreclosure of petitioner's mortgaged properties
and scheduled an auction sale; however, upon motion by petitioners, the lower court granted a
supplemental writ of preliminary injunction, staying the public auction of the mortgaged property.

Petitioners tendered to respondent bank the amount of P40,142,518.00, consisting of the

principal (P18,000,000.00) and accrued interest calculated at the originally stipulated rate of 21%. The
PNB refused to accept the payment.

As a result of PNB's refusal of the tender of payment, petitioners formally consigned the
amount of P40,142,518.00 with the RTC.

For Judge Ignacio's refusal to lift the writ of preliminary injunction, Respondent bank filed a
petition for Certiorari, Prohibition and Mandamus with respondent CA, assailing the orders of the RTC.

Hence the instant petition.

ISSUE:
Whether or not respondent bank was authorized to raise its interest rates from 21% to as high as 68%
under the credit agreement.

RULING:
NO. From the undisputed facts of the case, respondent bank unilaterally altered the terms of
its contract with petitioners by increasing the interest rates on the loan without the prior assent of
the latter.

In fact, the manner of agreement is itself explicitly stipulated by the Civil Code when it provides, in
Article 1956 that "No interest shall be due unless it has been expressly stipulated in writing." What has
been "stipulated in writing" from a perusal of interest rate provision of the credit agreement
signed between the parties is that petitioners were bound merely to pay 21% interest, subject to a
possible escalation or de-escalation, when 1) the circumstances warrant such escalation or de-escalation;
2) within the limits allowed by law; and 3) upon agreement.

The unilateral action of the PNB in increasing the interest rate on the private respondent's loan,
violated the mutuality of contracts ordained in Article 1308 of the Civil Code.

The Respondent bank's reliance on C.B. Circular No. 905, Series of 1982 did not authorize the
bank, or any lending institution for that matter, to progressively increase interest rates on borrowings to an
extent. True, escalation clauses in credit agreements are perfectly valid and do not contravene public
policy. Such clauses, however, (as are stipulations in other contracts) are nonetheless still subject
to laws and provisions governing agreements between parties, which agreements — while they
may be the law between the contracting parties — implicitly incorporate provisions of existing law.

Apart from violating the principle of mutuality of contracts, there is authority for disallowing the
interest rates imposed by respondent bank, for the credit agreement specifically requires that the increase
be "within the limits allowed by law". The Escalation Clause was dependent on an increase of rate made
by "law" alone.

For escalation clauses to be valid should specifically provide: (1) that there can be an
increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to
be valid, it must include a provision for reduction of the stipulated interest "in the event that the applicable
maximum rate of interest is reduced by law or by the Monetary Board."

Escalation clauses are not basically wrong or legally objectionable so long as they are not
solely potestative but based on reasonable and valid grounds. Here, as clearly demonstrated above,
not only the increases of the interest rates on the basis of the escalation clause patently unreasonable
and unconscionable, but also there are no valid and reasonable standards upon which the increases are
anchored.